Treasury Yield Curve Reaches Flattest Level Since 2009
The yield difference between Treasury five- and 30-year securities reached the flattest since 2009 as traders bet Federal Reserve Chair Janet Yellen remains on pace to raise interest rates next year even with slack in the jobs market.
The five-year note yield, more sensitive to investors’ outlook on monetary policy than that on longer-term debt in the so-called yield curve, touched a two-week high after Yellen said in a speech in Jackson Hole, Wyoming, there’s been “considerable progress” in strengthening employment. Yields on 30-year bonds fell amid concern tension in Ukraine is rising.
“People were looking for her to be a little more dovish,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “The rate hike may happen in the middle of next year as long as the economy continues to show some expansion. That’s why you’re seeing pressure on the front end and a flatter curve.”
Five-year note yields rose three basis points, or 0.03 percentage point, to 1.66 percent at 5 p.m. in New York. They touched 1.68 percent, the highest level since Aug. 5, after sinking before Yellen’s speech to 1.60 percent, and increased 12 basis points on the week. The price of the 1.625 percent security due July 2019 fell 1/8, or $1.25 per $1,000 face amount, to 99 27/32.
The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 34 percent to $354 billion. This year’s average is $325 billion. Daily volume reached $504 billion on Aug. 1, the highest level in three months.
Hedge-fund managers and other large speculators increased futures bets on Treasury two-year notes in the week ending Aug. 19 to a 100,080 net-long position, the biggest since April 2013, according to U.S. Commodity Futures Trading Commission data. The figure compares with net longs, or bets prices will rise, of 85,143 contracts a week earlier, data from the Washington-based CFTC show.
The yield curve flattened for a third day, closing at 150 basis points, the least since January 2009.
“The front end is trying to reprice to the timing of the first Fed rate hike and is struggling to get a sense as to when that’s going to happen,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, a primary dealer. ’’The back end is driven by expectations of growth, inflation and geopolitical considerations.’’
Long bonds erased earlier losses as the New York Times reported the Russian military has moved artillery units inside Ukrainian territory and is using them to fire at Ukrainian forces, citing NATO officials.
“The flight-to-quality trade is coming back to some extent in front of the weekend,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. At the same time, “the curve continues to trade off of the Yellen news, where she was right down the middle between hawkish and dovish.”
Benchmark 10-year (USGG10YR) note yields briefly approached the highest level in more than a week after an estimated $1 billion block trade of futures of the maturity. The note yield traded at 2.40 percent after touching 2.44 percent. Ten thousand September 10-year note futures contracts traded at a price of 125 25.5/32 at 10:31 a.m., CME Group data show.
“Our analysis of the price movement before and after the block trade signals to us that it was mostly likely a sale,” said John Brady, managing director for global futures and options at RJ O’Brien & Associates LLC in Chicago.
Yellen told central bankers and economists today at the Fed Bank of Kansas City’s annual symposium in Jackson Hole that determining when the job market has recovered fully is difficult, given the “depth of the damage” from the recession.
She underscored the Federal Open Market Committee’s statement after its July meeting that while gains have been made, “underutilization of labor resources still remains significant.”
Traders see a 53 percent chance the Fed will boost its benchmark rate from the current range of zero to 0.25 percent by July 2015, according to futures data compiled by Bloomberg. That compares with a 48 percent probability seen on Aug. 19, the day before the release of minutes of the FOMC meeting. The document spurred bets a rate boost might come sooner than traders projected.
Economic data this month showed the U.S. economy added more than 200,000 jobs for a sixth month in July, manufacturing expanded at the fastest pace in more than three years and housing starts increased more than economists predicted. The consumer price index rose 0.1 percent in July from June, the slowest in five months, Commerce Department data showed Aug. 19.
“The last thing the Fed wants to do is put themselves in a box,” said Sean Simko, who oversees $8 billion at SEI Investments Co. In Oaks, Pennsylvania. “It’s very data-dependent, which is what it should be.”
Simko is overweighting the five-year part of the curve. The central bank “is going to be patient” in raising rates, he said.
Minutes of the FOMC’s July meeting showed “many” officials said they may raise interest rates sooner than they had anticipated “if convergence toward the committee’s objectives occurred more quickly than expected.”
European Central Bank President Mario Draghi also spoke at the Jackson Hole conference, saying the ECB is ready to add more stimulus. Pressure is mounting on the euro region’s policy makers for radical measures such as bond purchases to spur a slumping economy.
To contact the editors responsible for this story: Dave Liedtka at firstname.lastname@example.org Greg Storey